Guest Post: Peak Denial About Peak Oil

It is par for the course that with oil hovering between $70 and $80
per barrel Americans have continued to buy SUVs and Trucks at a rapid
pace. Politicians don’t have constituents screaming at them because gas
is $4.00 per gallon, so it is no longer an issue for them. They need to
focus on the November elections. It is no time to discuss a difficult
issue that requires foresight and honesty. It is no time to tell the
American public that oil will be over $200 a barrel within the next 5
years. Anyone who would go on CNBC today and declare that oil will be
over $200 a barrel would be eviscerated by bubble head Bartiromo or
clueless Kudlow. Bartiromo filled up her Escalade this morning for $2.60
a gallon, so there is no looming crisis on the horizon. The myopic view
of the world by politicians, the mainstream media and the American
public in general is breathtaking to behold. Despite the facts slapping
them across the face, Americans believe cheap oil is here to stay. It is
their right to have an endless supply of cheap oil. The American way of
life has been granted by God. We are the chosen people.

A funny thing happened on our way to permanent prosperity and
unlimited cheap oil. The right to prosperity was yanked out from
underneath us by the current Greater Depression. The worldwide economic
downturn has masked the onset of peak cheap oil. Therefore, when it hits
America with its full fury, it will be a complete surprise to the
ignorant masses and the ignorant politicians who run this country. A
Gallup Poll in August asked Americans about our most important problems.
Where is the concern about future energy supplies? It isn’t on the
radar screens of Americans. They are probably more worried about whether
The Situation will hook up with Snookie on the Jersey Shore reality
show.

It is not surprising that the American public, American politicians,
and the American media don’t see the impending crisis. The organizations
that have an interest in looking farther than next week into the future
have all concluded that the downside of peak oil will cause chaos
throughout the world. The US Military, the German Military, and the UK
Department of Energy have all done detailed studies of the situation and
come to the same conclusions. Social chaos, economic confusion, trade
barriers, conflict, food shortages, riots, and war are in our future.

The U.S. was warned in 2005. Its own Department of Energy
commissioned a report by Robert Hirsch to examine peak oil and its
potential consequences to the US. The introduction stated:

“The peaking of world oil production
presents the U.S. and the world with an unprecedented risk management
problem. As peaking is approached, liquid fuel prices and price
volatility will increase dramatically, and, without timely mitigation,
the economic, social, and political costs will be unprecedented. Viable
mitigation options exist on both the supply and demand sides, but to
have substantial impact, they must be initiated more than a decade in
advance of peaking.”

The main conclusions reached by the experts who worked on this report were:

World oil peaking is going to happen, and will likely be abrupt.
World production of conventional oil will reach a maximum and decline
thereafter.

Oil peaking will adversely affect global economies, particularly the
U.S. Over the past century the U.S. economy has been shaped by the
availability of low-cost oil. The economic loss to the United States
could be measured on a trillion-dollar scale. Aggressive fuel efficiency
and substitute fuel production could provide substantial mitigation.

The problem is liquid fuels for transportation. The lifetimes of
transportation equipment are measured in decades. Rapid changeover in
transportation equipment is inherently impossible. Motor vehicles,
aircraft, trains, and ships have no ready alternative to liquid fuels.

Mitigation efforts will require substantial time. Waiting until
production peaks would leave the world with a liquid fuel deficit for 20
years. Initiating a crash program 10 years before peaking leaves a
liquid fuels shortfall of a decade. Initiating a crash program 20 years
before peaking could avoid a world liquid fuels shortfall.

It is a matter of risk management. The peaking of world oil
production is a classic risk management problem. Mitigation efforts
earlier than required may be premature, if peaking is long delayed. On
the other hand, if peaking is soon, failure to initiate mitigation could
be extremely damaging.

Economic upheaval is not inevitable. Without mitigation, the peaking
of world oil production will cause major economic upheaval. Given
enough lead-time, the problems are soluble with existing technologies.
New technologies will help, but on a longer time scale.

The Hirsch Report clearly laid out the problem. It urged immediate
action on multiple fronts. It is now 5 years later and absolutely
nothing has been done. In the meantime, it has become abundantly clear
that worldwide oil production peaked between 2005 and 2010. The Hirsch
Report concluded we needed to begin preparing 20 years before peak oil
in order to avoid chaos. We are now faced with the worst case scenario.

The US Military issued a Joint Operating Environment report earlier
this year. They have no political motivation to sugarcoat or present a
dire picture. This passage is particularly disturbing:

A severe energy crunch is inevitable
without a massive expansion of production and refining capacity. While
it is difficult to predict precisely what economic, political, and
strategic effects such a shortfall might produce, it surely would reduce
the prospects for growth in both the developing and developed worlds.
Such an economic slowdown would exacerbate other unresolved tensions,
push fragile and failing states further down the path toward collapse,
and perhaps have serious economic impact on both China and India. At
best, it would lead to periods of harsh economic adjustment. To what
extent conservation measures, investments in alternative energy
production, and efforts to expand petroleum production from tar sands
and shale would mitigate such a period of adjustment is difficult to
predict. One should not forget that the Great Depression spawned a
number of totalitarian regimes that sought economic prosperity for their
nations by ruthless conquest.

Here is the summary of their analysis:

To generate the energy required worldwide by the 2030s would require us to find an additional 1.4 MBD every year until then.

During
the next twenty-five years, coal, oil, and natural gas will remain
indispensable to meet energy requirements. The discovery rate for new
petroleum and gas fields over the past two decades (with the possible
exception of Brazil) provides little reason for optimism that future
efforts will find major new fields.

At
present, investment in oil production is only beginning to pick up,
with the result that production could reach a prolonged plateau. By
2030, the world will require production of 118 MBD, but energy producers
may only be producing 100 MBD unless there are major changes in current
investment and drilling capacity.

By
2012, surplus oil production capacity could entirely disappear, and as
early as 2015, the shortfall in output could reach nearly 10 MBD.

Energy
production and distribution infrastructure must see significant new
investment if energy demand is to be satisfied at a cost compatible with
economic growth and prosperity. Efficient hybrid, electric, and
flex-fuel vehicles will likely dominate light-duty vehicle sales by 2035
and much of the growth in gasoline demand may be met through increases
in biofuels production. Renewed interest in nuclear power and green
energy sources such as solar power, wind, or geothermal may blunt rising
prices for fossil fuels should business interest become actual
investment. However, capital costs in some power-generation and
distribution sectors are also rising, reflecting global demand for
alternative energy sources and hindering their ability to compete
effectively with relatively cheap fossil fuels. Fossil fuels will very
likely remain the predominant energy source going forward.

Just this week, the German magazine Der Spiegel obtained a
confidential study about peak oil that was done by the German military.
According to the German report, there is “some probability that peak oil
will occur around the year 2010 and that the impact on security is
expected to be felt 15 to 30 years later.” The major conclusions of the
study as detailed in Der Spiegel are as follows:

Oil will determine power: The Bundeswehr
Transformation Center writes that oil will become one decisive factor in
determining the new landscape of international relations: “The relative
importance of the oil-producing nations in the international system is
growing. These nations are using the advantages resulting from this to
expand the scope of their domestic and foreign policies and establish
themselves as a new or resurgent regional, or in some cases even global
leading powers.”

Increasing importance of oil exporters: For
importers of oil more competition for resources will mean an increase in
the number of nations competing for favor with oil-producing nations.
For the latter this opens up a window of opportunity which can be used
to implement political, economic or ideological aims. As this window of
time will only be open for a limited period, “this could result in a
more aggressive assertion of national interests on the part of the
oil-producing nations.”

Politics in place of the market: The Bundeswehr
Transformation Center expects that a supply crisis would roll back the
liberalization of the energy market. “The proportion of oil traded on
the global, freely accessible oil market will diminish as more oil is
traded through bi-national contracts,” the study states. In the long
run, the study goes on, the global oil market, will only be able to
follow the laws of the free market in a restricted way. “Bilateral,
conditioned supply agreements and privileged partnerships, such as those
seen prior to the oil crises of the 1970s, will once again come to the
fore.”

Market failures: The authors paint a bleak picture
of the consequences resulting from a shortage of petroleum. As the
transportation of goods depends on crude oil, international trade could
be subject to colossal tax hikes. “Shortages in the supply of vital
goods could arise” as a result, for example in food supplies. Oil is
used directly or indirectly in the production of 95 percent of all
industrial goods. Price shocks could therefore be seen in almost any
industry and throughout all stages of the industrial supply chain. “In the medium term the global economic system and every market-oriented national economy would collapse.”

Relapse into planned economy: Since virtually all
economic sectors rely heavily on oil, peak oil could lead to a “partial
or complete failure of markets,” says the study. “A conceivable
alternative would be government rationing and the allocation of
important goods or the setting of production schedules and other
short-term coercive measures to replace market-based mechanisms in times
of crisis.”

Global chain reaction: “A restructuring of oil
supplies will not be equally possible in all regions before the onset of
peak oil,” says the study. “It is likely that a large number of states
will not be in a position to make the necessary investments in time,” or
with “sufficient magnitude.” If there were economic crashes in some
regions of the world, Germany could be affected. Germany would not
escape the crises of other countries, because it’s so tightly integrated
into the global economy.

Crisis of political legitimacy: The Bundeswehr
study also raises fears for the survival of democracy itself. Parts of
the population could perceive the upheaval triggered by peak oil “as a
general systemic crisis.” This would create “room for ideological and
extremist alternatives to existing forms of government.” Fragmentation
of the affected population is likely and could “in extreme cases lead to
open conflict.”

Even the International Energy Agency, which has always painted a rosy
picture of the future, has even been warning about future shortages due
to lack of investment and planning.

Americans think that the discovery of oil on our soil in 1859 has
entitled us to an endless supply. It is not so. We account for 4.3% of
the world’s population but consume 26% of the world’s oil. As China,
India and the rest of the developing world become economic powerhouses,
they will consume more and more of the dwindling supply of easily
accessible oil. As the consumption curve continues upwards, the
production curve will be flat. The result will be huge spikes in prices.
It will not be a straight line, but prices will become progressively
higher. As the studies referenced above have concluded, the result will
be economic pain, social chaos, supply wars, food shortages, and a
drastic reduction in lifestyles of Americans. They won’t see it coming,
just like they didn’t see the housing collapse coming or the financial
system collapse coming. They’ll just keep filling up those Escalades
until the pump runs dry.